Sri Lanka warned of impending foreign debt crisis by IMF

Nov 30, 2007 (LBO) – The International Monetary Fund (IMF) has warned that Sri Lanka may be heading towards a foreign debt crisis unless the island changed its recent habit of borrowing commercial dollars to bridge high budget deficits. IMF’s executive directors in an assessment after the international monetary watchdog completed its annual Article IV consultations with the island said there was a significant risk of ‘public debt distress’, an euphemism for sovereign default.

“Directors noted the significant risk of public debt distress in Sri Lanka, arising from heavy reliance on dollar-denominated, short-term commercial debt,” IMF said in a statement released Thursday.

“They stressed the need to lengthen and smoothen the maturity profile of the debt to reduce rollover and liquidity risks, including through capital market refinancing, and to improve debt management in general.”

IMF said liquid conditions in local and international markets had allowed Sri Lanka to take on dollar-denominated short term debt to bridge deficits and top up foreign reserves.

IMF said this has resulted in foreign exchange debt ‘bunching’ in the next few years but “so far” favorable market conditions have allowed the government to roll